Joint guidance published by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) provides clarity for crypto asset platforms with respect to advertising, marketing and social media use in Canada.
- Principal requirements with respect to advertising, marketing, social media activities, fee disclosure and other compliance matters for crypto-trading platforms under Canadian securities legislation are set out in the guidance, with examples of statements that could be considered false or misleading.
- Advertising and marketing activities may be reviewed by the CSA as part of the registration review process and following registration as part of a compliance review.
- The CSA may take enforcement action, including against foreign-based crypto-trading platforms with investors in Canada that do not comply with Canadian securities legislation.
On September 23, 2021, the CSA and IIROC issued Joint Staff Notice 21-330 Guidance for Crypto-Trading Platforms: Requirements relating to Advertising, Marketing and Social Media Use (the Notice). The purpose of the Notice is to provide guidance and clarity for platforms that trade crypto assets (CTPs) on how requirements relating to advertising, marketing and social media use under applicable Canadian securities legislation and IIROC rules (as applicable, Canadian securities legislation) may apply to them. The Notice also serves as a warning to CTPs seeking registration in Canada on potential compliance issues that could be raised in the registration process.
Regulation of Crypto-Assets
The Notice outlines the principal requirements under Canadian securities legislation in relation to advertising and marketing, social media activities, transparency around fee disclosure and other compliance matters, and is intended to assist:
- CTPs that are registered as a dealer under securities legislation (registered CTPs);
- CTPs that have or will be applying for registration as a dealer but are not yet registered (prospective CTPs); and
- Other registrants that may be considering establishing a CTP as a new business line.
The Notice refers to CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets and reminds market participants that if crypto assets that are securities and/or derivatives are traded on a CTP (whether Canadian-based or global), the CTP may be subject to applicable Canadian securities legislation if it admits Canadian-resident users. It also notes that securities legislation may apply to CTPs that facilitate the buying and selling of other crypto assets, including crypto assets that are commodities, because the CSA take the view that the user's contractual right relating to the crypto asset itself may itself constitute a security and/or a derivative. Please see our previous post on the registration requirements and current regulatory framework.
Problematic statements or practices
In the Notice, the CSA signal particular concerns with:
- Statements in advertising and marketing materials that could be considered false or misleading.
- The use of gambling-style contests, promotions or schemes, such as the offering of bonusesor rewards based on the level of trading, that may encourage excessive trading by retail investors.
- Compliance and supervisory challenges when using social media to promote CTPs.
- Compliance with Canadian securities legislation generally in this area.
False or misleading statements
Several requirements of Canadian securities legislation may apply to CTPs in respect of statements made in advertising or marketing materials. The Notice outlines a number of examples of statements that may be contrary to applicable restrictions. These include:
- Suggesting that a CTP is registered under securities legislation when it is not. For example, the Notice states that a CTP must not refer to itself as an "exchange" or a "marketplace" unless it is recognized as one under Canadian securities legislation. Therefore, an unregistered CTP operating under the name "XYZ Exchange" could be offside this guidance.
- Suggesting that a securities regulatory authority or regulator has approved or endorsed the CTP, any products offered on the CTP or other representations made by the CTP. This could include a CTP making statements that it meets other regulatory requirements (such as a money services business license). The Notice cautions that these statements may be false or misleading by implying that compliance with other legislation is sufficient to protect the interests of clients or is comparable to securities regulatory requirements.
- Stating that the CTP does not have suitability
obligations, and that it is not required to tell clients whether
crypto trading is suitable for them. The Notice
states that CTPs will be subject to an obligation to perform an
appropriateness assessment for every client at the account opening
stage, even where the CTP has been granted an exemption from the
obligation to make a suitability determination on a trade-by-trade
basis. Specifically, CTPs are generally required to perform account
and product assessments, considering a client's
- experience and knowledge in investing in crypto assets,
- experience in using order execution only online brokerages,
- financial assets and income, and
- risk tolerance.
The CTP must also assess the crypto assets approved to be made available on the platform.
- Stating that the CTP does not charge any commissions. The Notice states that references to commission-free trading may be false or misleading if the CTP instead charges a markup on the best price it is able to obtain, takes a spread on trades where it acts as a market maker, or monetizes client order-flow for the CTP's benefit, and does not provide reasonable disclosure to clients explaining the basis for these alternative forms of compensation. These statements may also be false or misleading if the CTP offers only certain types of products on a commission-free basis, and other types of products are subject to commission.
The CSA and IIROC also have concerns with misleading statements or omissions in relation to matters that a reasonable investor would consider relevant or important in deciding whether to enter into or maintain a trading or advising relationship. They further note that unbalanced and overly promotional statements may also contravene the requirement that marketing materials be fair, balanced and not misleading. By way of example, the CSA note concern with the following statement "[o]ur platform is consistently rated the safest and most trusted platform by leading rating agencies, including [X]".
CTPs are advised to ensure that:
- They are able to substantiate claims made in marketing materials and include sufficient discussion of risks,
- Applicable disclaimers and key assumptions reasonably relate to the statements to which they apply, are located proximate to those statements and are not be used to justify a statement that is false or misleading,
- Information from third party sources is verified through appropriate due diligence, and
- Records of third party source data and supporting information are maintained.
The Notice urges registered CTPs to develop their advertising and marketing strategies in the context of their obligation to treat their clients fairly, honestly and in good faith under Canadian securities legislation. These strategies may also be subject to related know-your-client, know-your-product and suitability assessment obligations and the requirement that registered CTPs identify and respond to conflicts of interest in the best interest of the client.
Gambling-style contests, promotions or schemes
The CSA and IIROC note that certain CTPs engage in advertising or marketing strategies that may inappropriately encourage investors to engage in excessively risky trading. Examples include a promotion involving a bonus scheme offering a financial reward in a particular type of crypto asset for the first 500 investors within 24 hours. The Notice states that this type of advertising and marketing strategy may, depending on the circumstances, violate a registrant's obligation to treat clients fairly, honestly and in good faith.
Further, advertising and marketing strategies designed to encourage trading may be considered a form of solicitation or invitation to trade, which may trigger suitability obligations for registered CTPs. The CSA expect that CTPs that have sought exemptions from these obligations will ensure that their advertising and marketing strategies conform with the conditions of their exemptions. For example, statements that present an urgent tone about a rapidly rising crypto asset while urging clients to not miss out may be considered a form of recommendation and may conflict with the terms of trade-by-trade suitability relief which precludes a CTP from making recommendations or giving advice.
Social media use
CTPs are reminded to consider compliance and supervision when using social media platforms to communicate with clients and the general public. For example, registered CTPs are expected to have systems to ensure compliant record retention and retrieval capability in social media websites. The Notice signals the challenges of complying with recordkeeping requirements in relation to both real time and static content. CTPs must also maintain an appropriate level of supervision of the use of social media by CTP representatives and authorized third parties, particularly in relation to the use of misleading and false statements.
CTPs are advised to adopt policies and procedures governing their use of social media for marketing, including to provide for review, supervision, retention and retrieval of their advertising and marketing materials and to designate an individual responsible for these functions. CTPs should also develop a system that will effectively monitor compliance with these policies and procedures.
Other general considerations and enforcing compliance
Specific examples of statements or practices that may contravene Canadian securities legislation are described in Appendix A to the Notice. The Notice warns that engaging an individual to promote specific crypto-related products and services on the CTP may, depending on the nature of the promotion, be considered a form of recommendation or advice in relation to securities or derivatives, which may trigger obligations under securities legislation for both the CTP and the individual making the promotion. This practice may contravene Canadian securities law depending on the circumstances, and in particular where it does not comply with the existing "general advice" exemption.
The Notice reminds registrants of their gatekeeper function and signals that CSA staff may review advertising and marketing as part of the fitness for registration review process and, following registration, as part of a compliance review. The Notice states that, as CTP technology and operating models continue to evolve, the CSA and IIROC welcome ongoing dialogue with CTPs and stakeholders on compliance issues and areas where additional flexibility may be appropriate. The Notice cautions, however, that CSA members may take enforcement action against CTPs, including foreign-based CTPs that have investors in Canada, that do not comply with the requirements of Canadian securities legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.